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They Just Don’t Get It

Sen. Tom Harkin has issued his final report on for-profit higher education, a book-length indictment of one-tenth of American higher education, the for-profit sector. Obviously I have not had an opportunity yet to read the full report (I’ve been traveling for the past week or so), but from news reports alone, I see huge problems with it, much of it related to either an ignorance or contempt for how the capitalistic system of free enterprise does a very good job of delivering the goods—lots of them—in America. It is market-incentivized ingenuity and enterprise that leads millions every decade to migrate here to enjoy the fruits of the labor of American capitalism.

To be sure, the report concedes that for-profit education is here to stay, and even acknowledges that several providers (e.g., Strayer Education) have done a relatively good job, and others are at least making some positive moves (including Apollo, the owner of the University of Phoenix, the market leader). But the report appears far more negative than positive, while essentially ignoring problems with marginally performing public institutions that, unlike the for-profits, receive direct taxpayer subsidies.

A central point of the Harkin report is that at a big sample of for-profit institutions, over 40 cents of each dollar collected goes for marketing expense or profits, meaning a somewhat lower proportion goes for instruction than at a typical not-for-profit university. The inference is that students and learning are neglected.

This is a meaningless comparison on lots of grounds. Let us take profits. First, the 19-cent profit margin reported is pre-tax—unlike other colleges, the for-profits pay income taxes, some of which subsidize their competitors. Second, the not-for-profits have vast expenditures for constructing buildings, etc., not counted in operating expenses. Profits are a market-based assessment of the cost of the use of capital resources by private entrepreneurs. Given the risks associated with doing business (some of it imposed by Senator Harkin himself), the profit margin for the for-profits appears to be roughly in line with other parts of America’s capitalistic system. In a real sense, the for-profit higher-education sector uses honest accounting rules, the traditional sector dishonest ones, often not properly accounting for depreciation of capital or, especially at state schools, honestly assessing pension liabilities. In a sense, Harkin is comparing apples to oranges.

It is true that for-profits spend more on marketing expenses. There is a vast literature on the economics of advertising that argues ads serve a legitimate and important informational function, leading to more informed consumer choices. Moreover, some expenses in this category involve schools’ marketing their students in job markets, something woefully neglected and underfunded by many traditional universities. The for-profits have learned that happy customers who get good jobs are good word-of-mouth advertising, so they devote more resources to this function than other schools, to the benefit of both the students and the institutions.

It is true that many of the for-profits have high drop-out rates, but are they really any worse than some of our public universities, like the University of Texas at San Antonio or Chicago State University, schools with thousands of students but very low graduation rates? Should we impose some sort of selective admission standards on all schools wanting government handouts? I suspect that if one compiled a list of all institutions where the six-year graduation rate was below, say, 40 percent, a larger number of students would attend public as opposed to for-profit institutions. The attack on the for-profits is an attack based on ideology, a dislike of capitalism, more than on a comprehensive and objective concern for students. The clearly one-sided nature of Harkin’s criticism may be one reason that his report was not issued by all the Democrats on the Senate education committee—my guess is some did not want to be associated with this unbalanced attack.

Now to Elijah Cummings, representative from Maryland, who issued a report (again from himself, not even all the Democrats on his committee), attacking high executive compensation at for-profit schools. It is true that the CEO’s of organizations like Apollo, Strayer, DeVry and Bridgepoint make very good money, often far more than the heads of large state or private universities. But they also take bigger risks, deserve combat pay for facing opposition from the likes of Tom Harkin, etc. Moreover, their pay is not out of line with what heads of comparable-sized for-profit companies in other sectors make.

Less time should be focused on dumping on 10 percent of higher education, and more on the truly big problems Congress is ignoring. For starters, how has the now-mammoth federal involvement in financing student higher education affected costs, student performance, low-income student college participation and labor-market success of graduates? Why should the federal government allow accreditation reports of schools receiving federal funds to remain hidden from public scrutiny? Should federal tax exemptions be granted for building sky boxes or funding sport “scholarships” to fuel an athletic arms race that has brought corruption and scandal to higher education? The list goes on and on. Stop trashing the 10 percent—focus on the 100 percent. Are there fly-by-night operators in the for-profit sector? Yes, and they should not receive federal subsidies. But that could be said about some traditional schools as well.